These 4 Measures Indicate That Bobst Group (VTX:BOBNN) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Bobst Group SA (VTX:BOBNN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Bobst Group

What Is Bobst Group's Debt?

As you can see below, Bobst Group had CHF341.0m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have CHF494.9m in cash offsetting this, leading to net cash of CHF153.9m.

How Healthy Is Bobst Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Bobst Group had liabilities of CHF806.3m due within 12 months and liabilities of CHF440.6m due beyond that. Offsetting these obligations, it had cash of CHF494.9m as well as receivables valued at CHF364.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF387.8m.

Bobst Group has a market capitalization of CHF1.41b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Bobst Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Bobst Group grew its EBIT by 502% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Bobst Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Bobst Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Bobst Group actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

Although Bobst Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CHF153.9m. And it impressed us with free cash flow of CHF147m, being 154% of its EBIT. So we don't think Bobst Group's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Bobst Group that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.